New York state government lawyers are looking to extinguish a federal court challenge by opioid distributors to a new state law imposing a surcharge on their business, but they've added an alternative for the court—that the case be moved from federal to state court.

Assistant Attorney General Seth Farber argued that federal law prevents the companies from bringing litigation against the surcharge in federal court because it is a state tax which may only be challenged in state courts.

“In this case, Plaintiff challenges a revenue raising scheme the Legislature created in order to generate a fund to provide critically needed opioid treatment and education services,” Farber wrote. “Such issues as the correct remedy for an arguably unconstitutional state surcharge (for relevant purposes, a tax) are more readily and appropriately brought in State courts.”

Farber said allowing the lawsuit to move forward in federal court would violate the Tax Injunction Act, which prevents federal courts from assessing taxes enacted under state law when state courts are able to handle the litigation. In this case, he argued, state courts would be able to take the case.

Even if the lawsuit did eventually end up in federal court, Farber said, legal precedent suggests that the opioid companies should still seek relief first in state court. He argued that the U.S. Supreme Court decision in Railroad Commission v. Pullman in 1941 found it appropriate for a federal court to abstain from such a legal challenge in favor of state proceedings.

The lawsuit is over what's called the Opioid Stewardship Act, a law included in this year's state budget mandating that opioid manufacturers and distributors collectively pay $100 million each year to the state over the next six years.

The amount each company is required to pay is based on the amount of product they sell. If one opioid manufacturer or distributor sells 10 percent of the state's opioids, for example, they would pay $10 million to the state.

That money is then set aside into the Opioid Stewardship Fund, which will be used for opioid addiction treatment, recovery, prevention and education services, according to the law. New York was the first state in the country to create such a program.

The Healthcare Distribution Alliance, a coalition of pharmaceutical distributors, sued over the new law in July on behalf of the state's opioid companies. They are represented by M. Miller Baker, partner at McDermott Will & Emery in Washington, D.C. He declined to comment on the motion Friday.

The opioid companies called the law “trial by legislature” in their original complaint because the law seemed to place blame on those companies for causing the opioid epidemic.

“The Act singles out certain entities to bear this liability without adequately determining culpability,” they wrote in the complaint. “It forces manufacturers and distributors, but not pharmacies or medical professionals, to pay for alleged harm resulting from a public health problem involving numerous actors.”

Farber made a brief argument against that claim in the motion to dismiss, saying the law was not imposed to punish those companies. Instead, its intent is to raise money to combat the opioid epidemic, he wrote.

“Here, the legislative record clearly shows that the Act's purpose was funding badly needed opioid treatment and education programs, thus amounting to a taxing scheme,” Farber said. “Plaintiff has not come close to making the requisite, overwhelming showing that the Act was instead an unconstitutional legislative trial and punishment.”

Farber also rebutted an argument from the opioid companies that the law should be struck down because it uses data from 2017 to determine their first surcharge in 2019. The opioid companies had said if they knew about the surcharge last year, they may have adjusted their business in New York to reduce the amount they would be required to pay into the fund.

Farber argued that there is no established rule barring the use of data from one year ago to impose the first surcharge, and that the use of the previous year's data will not be an issue in future years.

“The use of 2017 data is hardly so unreasonable as to amount to an unconstitutionally retroactive enactment,” he said. “Further, the retroactivity lessens in subsequent years as licensees will be notified of their ratable shares by October 15th following the conclusion of the year upon which those amounts are based.”

The opioid companies had also argued against a part of the law that prohibits them from passing on the cost of the surcharge to customers. They said the state should not be able to enforce that provision because it would force them to instead recoup the cost of the surcharge from out-of-state opioid manufacturers that the state has no authority over.

“That is to say, because distributors cannot recoup the Surcharge from downstream purchasers, the Act forces them to seek to recoup the cost of the Surcharge from manufacturers, including out-of-state manufacturers that do not sell directly into New York,” they said in the complaint. “In so doing, the Cost-Pass-Through Prohibition has the effect of indirectly imposing on out-of-state manufacturers surcharges that New York cannot impose directly.”

Farber said that argument was speculative and could not be litigated by the court because the hypothetical scenario had not yet played out for those distributors. He also argued that, even if some burden was placed on interstate distributors, those companies have the resources to pay for it.

“Although the Act may place some incidental burden on interstate distribution of opioids, the main distributors are fully capable of bearing it,” Farber wrote.

Attorneys for the Healthcare Distribution Alliance have also moved to resolve the case by summary judgment rather than trial. The state opposed that motion in a separate filing this week, saying that if the lawsuit is not dismissed, they would need to seek discovery to refute several claims from the plaintiffs.

“In many instances, Defendants would need discovery to respond to Plaintiff's allegations, since they concern facts within Plaintiff's sole possession, and discovery has not yet occurred at this stage,” the state's filing said.

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